A fading recovery, persistently high unemployment, Europe's debt troubles and commercial real estate losses have garnered most of the attention. But some Fed officials have begun talking more about another trouble zone -- recession-hit U.S. state and local government finances.

The problem is that they have to balance their budgets, unlike the federal government, which is running a deficit equal to more than 10 percent of total economic output.

"They have no choice but to cut spending or raise taxes -- or they get some more help from Washington," said Harm Bandholz, an economist with Unicredit in New York.

He thinks state and local government finances represent the most important domestic risk factor in the U.S. economy. Yet they received only two brief mentions in 19 pages of minutes from the Fed's April policy-setting meeting.

Minutes from the Fed's last meeting, on June 22-23, set for release on Wednesday, are likely to show the central bank trimmed its economic growth forecast, largely because of a run of disappointing data and fears of a European slowdown.

Bandholz said the Fed may be reluctant to say much more about state and local government budgets because that would involve treading into the realm of fiscal policy, which is the Treasury Department's responsibility.

I disagree with this assessment. The Fed can get away with blaming Europe for several more months and has already made a pretty firm commitment to zero percent interest rates for about as long as they can handle or until Mayan doomsday, whichever comes first. In order for them to accept this as a pain in their already sore ass, they'd have to first forget all that other shit that they blame and be realistic about what we face here. But let the deflationistas rule for now.

The Fed doesn't care about saying more about the situation because eventually it means that they will be tapped to meet the Treasury's needs. And if I heard them correctly, they did start getting sick of that some time ago, despite appearances that Zimbabwe Ben wants to print money indefinitely to stave off the deflation that isn't happening.